JLT Risk Manager: Recession Puts Pressure on U.K. Property Investors

LONDON, May 11, 2009 (A. M. Best via COMTEX) -- LLTHF | Quote | Chart | News | PowerRating -- As the recession takes hold in the United Kingdom, property investors should pay very close attention to risk management, according to John Searing, head of property risk for broker Jardine Lloyd Thompson Group plc in London.

Leaner economic times have brought down rents and eaten into the investment earnings of insurers, Searing said. ?It?s a buyer?s [rental] market,? he said in an interview at JLT?s offices in London. ?So the landlords aren?t necessarily getting the rents that they would hope for.?

Property owners should be aware of clauses that might enable a tenant to escape from a lease, Searing said. ?Tenants are treated like gold dust at the moment,? he said, ?prospective tenants, even more so.?

The drop in insurers? investment income, Searing said, ?makes the underwriting performance so much more critical to them.? The recession is also bringing an increase in vacancies, and empty buildings attract malicious damage.

A vacancy rate of 5% of square footage might be regarded as favorable, Searing said. He is now seeing rates in the worrying range of 25% to 30%.

A Big Market

Searing described the U.K. property market as ?very big.? Large investors include insurance companies, pension funds and property companies. A very large insurance company could have a property portfolio with a value approaching 30 billion pounds (33.8 billion euros), he said.

JLT (LSE: JLT) places business with insurers and provides clients with consultancy services. Last year, Searing said, JLT more than tripled the size of its property operations in London.

Searing?s market includes both commercial and residential properties, with a bias toward the commercial. Properties in his book of business include office buildings and retail and industrial parks, shopping centers and retail stores.

Because property investors make their money from the rent, assets that are in good condition are more valuable than those that are in disrepair. Investors also have to be aware of the possibility that tenants may become insolvent and be unable to pay their rent, Searing said.

JLT will convey a client?s favorable claims record, and evidence of its own risk management expertise, to an underwriter with the intention of winning a lower premium. The message to the insurer is: ?You?ve got to put some money on the table,? said Searing.

For their part, the insurers have complained that in the past this money did not always go into risk management, he said.

Risk management awareness can vary from client to client. ?A lot are very focused on it,? Searing said. ?They have internal risk management and risk engineering staff, and they?re well aware of the importance of keeping their risk under control.?

Other clients might put risk management more on the back burner, concentrating instead on such things as their investment returns.

Most clients are in the middle, Searing said. They understand the importance of keeping their properties in good condition and maintaining the flow of rental income. JLT is able to help the majority of its clients that do not have their own in-house risk managers.

Searing argues that for a property owner to cut back on maintenance during a recession would amount to a false economy. ?It?s important to keep those services going,? he said.

He also tries to impress on clients the extent of hidden costs that can accompany a major loss. These include the management of time.

Higher vacancy rates raise issues of risk management, Searing said. ?I don?t think underwriters are necessarily focused on that yet,? Searing said. ?But as risk managers, we are. And we?re advising clients of the additional work that they?ve got to do.?

One source of concern, Searing said, is the property that is still earning rent even though it has been left vacant by its tenants. The vacancy increases the risk to the property, he said.

Searing also noted the pressures that, he believes, could cause insurers to drop universal flood cover on a selective basis in the United Kingdom. He called the existence of such protection ?quite unusual on a world platform and even on a European platform.? A retreat by underwriters from flood cover would increase the need for risk management advice, Searing said.

Searing sees signs for optimism in the U.K. property market. He suggested that the weakness of the pound is bringing foreign investors into the market.

(By Robert O'Connor, London editor: Robert.OConnor@ambest.com)

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